Financial Advisers: Show Us Your Numbers

If you want to know the track record of a mutual fund or exchange-traded fund, you can look it up in a matter of seconds online. But what about the track record of a financial adviser who is offering to pick investments for you?

“I have to think investors would want to know that, but I don’t know how many are actually asking for it,” says Charles Rotblut of the American Association of Individual Investors in Chicago, a nonprofit with 170,000 members nationwide.

“If the adviser is talking about how much return he can get for you,” adds Mr. Rotblut, “then it’s a very fair question” to ask him what his own returns have been.

While some financial advisers who cater to individual investors are willing to calculate and report their own average historical returns, the vast majority still don’t—and probably won’t until investors smarten up and start demanding it.

“It’s baffling to me,” says Tim Medley, president of Medley & Brown, a financial adviser in Jackson, Miss., that manages $575 million and publicly updates its performance monthly online. “The advisory business has grown dramatically, and I would have guessed that by now a lot more advisers would be posting their rates of return on their websites.”

Mind you, every client opens and closes accounts at different times, in a variety of investments, with various levels of risk. But that doesn’t mean an advisory firm can’t calculate the average return it earns for its clients. Every investor in a given mutual fund also is unique, but all mutual funds report their past returns in the same standardized format.

Of course, much of the value of a financial adviser can’t be captured by measuring the track record of his investment picks alone. By reducing your taxes, planning your estate and retirement, cutting your debt and adjusting your insurance coverage, an adviser can make you much richer and more secure.

Those benefits often can’t be quantified. But that still shouldn’t exempt advisers from reporting results that can be quantified, like investment returns.

Even so, most financial advisers remain reluctant to calculate their results. Jonathan Pond, president of Jonathan D. Pond LLC, a financial-advisory firm in Newton, Mass., that manages approximately $230 million, says he worries that the Securities and Exchange Commission would second-guess any such numbers, raising the potential for regulatory reprimand.

“As a result, we absolutely do nothing as far as putting out performance data,” he says. “It will be a cold day in Hades before we put that sort of thing in a brochure.”

If a prospective client is curious about the track record of his firm, says Mr. Pond, he will find two existing clients whose situations are comparable. Then his staff prints out portfolio holdings for each, removes the personal identifying information and sends the documents to the prospective client—who is then free, Mr. Pond says, to look up the past performance of each holding separately online.

“I find that to be a way to provide them with some information and comfort,” he says.

Most investors probably won’t even go that far, says David Spaulding, head of the Spaulding Group, a firm in Somerset, N.J., that measures investment performance. “In a relationship business, many clients just say, ‘Why would I ask about numbers? This guy clearly knows what he’s doing.’ So nobody brings it up.”

Another reason advisers don’t make these disclosures may be that they don’t know—or even want to know—their returns.

“Advisers want to have confidence in themselves,” says Joachim Klement, chief investment officer at Wellershoff & Partners, a Zurich-based firm that consults on investors’ portfolios but doesn’t manage assets directly. “Knowing their own performance numbers might give them a sense of insecurity instead.”

It doesn’t have to be this way. The Global Investment Performance Standards for calculating and presenting returns, created by the nonprofit CFA Institute, based in Charlottesville, Va., make it relatively simple for firms to report their results—and for clients to understand them.

David Fried, president of Fried Asset Management in Santa Monica, Calif., manages $45 million and says it costs his firm roughly $4,500 annually in software, staff and consulting costs to use GIPS to calculate how its clients’ portfolios perform overall. “It’s just the right thing to do,” he says.

“If an adviser says that every client is different, then how can he realistically be an expert on investing in all those different ways?” Mr. Fried asks. “And if they aren’t all different, then the adviser must have a few core strategies, and then the return for each of those can be reported.”

Before you hire a financial adviser, ask to see his track record in writing.

That shouldn’t be just the results of a single client, a cherry-picked handful of lucky stock picks or market calls, or a short-term snapshot that starts in early 2009 at the beginning of an epic bull market.

It should instead present a composite of how large numbers of clients’ portfolios fared over multiple time periods—say, the past one, three, five and 10 years, after all fees. It’s a plus if the results conform to the GIPS standards from the CFA Institute.

If enough clients start asking, advisers will have to apply the same scrutiny to their own performance that they claim to apply to funds and other investments.

Good yardsticks and rulers, after all, bear their measurements on both sides.